WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.
But that happy situation, aided by ultralow interest rates, may not last much longer.
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.
The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.
The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.
The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.
“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”
The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.
“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.
On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.
Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.
The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.
Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.
The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.
Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.
But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.
The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.
To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.
Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.
This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.
“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.
“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
Attention to the senate races on November 4th was little compared to the hot seat of the presidential race. However, now that several states face runoff elections, Republicans worry about a Democrat filibuster-proof majority. Following three runoff elections, the Democrats move closer to the majority.
In Minnesota, Al Franken follows Republican Norm Coleman by only 200 votes. According to the Franken campaign on November 28th, they were confident of a Franken win. Franken has the opportunity to sue, forcing absentee ballots that are rumored to have been miscounted, to be recounted. Franken could easily achieve his 200 votes here.
While in Alaska, Ted Stevens' recent conviction allowed Mark Begich to swoop in and collect votes. Begich, Anchorage mayor, and a democrat in a mostly Republican state now leads the polls in a hotly contested Senate race. The Daily Kos shows Begich leading by 1,022 votes as of 3:30 PM December 1st, 2008. Although Stevens still has a chance to win, it is likely he will be forced to step down, as if a senator could operate behind bars!
Also, it proves hard for Georgian Clarence Saxby Chambliss to win. Chambliss, the Republican incumbent in Georgia's runoff election against Democrat Jim Martin, holds only the religious right over Martin. His lead in the polls was not solid, and he trailed in the under 45 vote. Georgia's runoff election is to be held December 2nd.
With all three of these races seemingly headed the Democrat way, the Democrats then holding 58 seats in the Senate. The Democrats would then be only 2 seats away from a filibuster-proof majority. These 2 seats are left to the independents, who, as a rule must vote Democrat. There you have it! Your filibuster-proof majority is likely on its way!
But why, you ask? Why is this majority so devastating? Paired with the new Obama cabinet (quite liberal enough) and Harry Reid and Nancy Pelosi, the Democrats would be unstoppable. The problem is only exacerbated by the rumors that two conservative Supreme Court Justices will step down over the course of the Obama presidency. Obama would be allowed to whatever he wanted without question or refusal. These actions only further prompt the Republican party to swing even more right-wing, and lose the support of moderates. It is likely that it will take two turnover elections before Republicans ever hold the power they once had.
On January 20th, America had better prepare for the demise of the system. We must all prepare for the loss of our rights and the trend toward nationalization, toward throwing money at symptoms and not the roots. The Democrats will hold sovereign rule over this country for at least 4 years.
The stock market crash of 2008 is the worst that the world has ever seen in terms of the number of points erased from the major indices. At its lowest point to date, the Dow Jones Industrial Average has lost a historical 6749 points! To put this into perspective, the 2001 to 2003 bear market merely erased 4153 points off the Dow. In fact, many veteran economists and investors swear that this is the worst economic and stock market crisis since the Great Depression with unemployment rate already higher than the peak unemployment rate of the last crisis (according to unemployment rate of Oct 2008).
With the gloom spreading across the world, this market crisis has evolved into a global economic crisis with major firms collapsing like they didn't exist the day before. This has further affected investor confidence in stocks and shares and worsened the stock market crisis. Even options traders who has the ability to profit in every market conditions found it hard to make consistently high profits using stock options due to the extreme volatility. One question repeatedly hit the wires… when and how will this stock market crash end?
First and foremost, the stock market cannot go down to zero. All the companies in the world cannot collapse completely. It didn't happen during the great depression and it won't happen this time round, so, don't worry about that. The question next is; where is the bottom? As the saying goes, it's always darkest before dawn. This saying has been vindicated time and again during the past few crises. During the last crisis, the stock market started recovering when most investors think that the market is doomed and when economic numbers are at its worst. This is because the stock market is a discounting mechanism, not a reporting mechanism! It moves ahead of the real economy and according to future expectations. That is why stock market bottoms are usually marked by a multi-year low economic numbers. So, which economic number is most reliable in putting a bottom to the stock market?
Unemployment rate.
Unemployment rate is the first and last indicator that convinces investors of the state of the economy. During the last stock market crisis in 2003, the stock market starting recovering when unemployment rate peaked at 6.3%. During the 1973 to 1975 stock market crisis, the stock market started recovering when unemployment rate peaked at 9% in 1975. The great depression also ended in 1932 after unemployment rate peaked at 23.6%. From the past stock market crises, I observed that the stock market has turned around before the economy does as soon as unemployment rate hit a peak.
In fact, a combination of a reversal in unemployment following a peak and the recovery in the stock market definitely points towards pending economic recovery. Why is unemployment rate such a good economic and stock market indicator? That's because companies don't start hiring more unless they have the potential to make more money with these hiring! There will always come a point in every economic depression when companies that have survived would find unique opportunities and low prices that were not available before. These companies would rush in on these opportunities, hire more and spur the economy upwards again.
The only question is, how do we tell if the unemployment rate has hit a peak?
This is a question that baffles even the most veteran of economists. In an economic crisis, every time unemployment rate looks like it cannot go any higher, higher it goes the next month. As such, most investors and options traders would not know where the peak is until it unemployment rate starts coming down again and missed the initial recovery of the stock market. As such, during this market crisis, I would be watching unemployment rate very closely right now as it moves higher than the last crisis. Every time a higher number is hit, I would watch for accumulation in the stock market. So far, the stock market has not accumulated with each higher unemployment rate number. As soon as it does, I would certainly be more conservative and enter using hedged long positions through options trading so that it I am wrong, I don't get hurt.
This stock market crisis is going to end like all the rest have with peak unemployment rate number and I am going to be watching it like a hawk and be ready for it.
The head of the International Monetary Fund has warned that the global economy is still in a “highly fragile” state following the financial crisis, and could face further turmoil in the months ahead.
Dominique Strauss-Kahn, managing director of the IMF, said the world economy was currently stuck in a “holding pattern”, just over a year after the collapse of Lehman Brothers. He said it was essential that world leaders continue to work together, and argued it is too early to start reversing the various stimulus measures implemented around the globe.
“Financial conditions have improved but are far from normal,” Strauss-Kahn told business leaders at the CBI's annual conference in London. “Signs show confidence returning, but banking systems in many advanced economies remain undercapitalised, weighed down by leaden legacy assets and, increasingly, underperforming loans.
“On the household side, weak financial positions and high unemployment will damp down on consumption for some time … and large public deficits add to vulnerabilities.”
Strauss-Kahn said there were four key challenges facing world leaders – exit strategies, capital flows to emerging markets, sources of future growth and financial regulation.
Support for a Tobin tax?
Strauss-Kahn had recently ruled out a transaction tax on City profits, such as a new version of the “Tobin tax” which prime minister Gordon Brown is lobbying for.
Today, though, the IMF head softened his position – and even appeared to acknowledge Brown's efforts in this area.
“This is a very lively debate, and there are many good ideas being floated – especially here in the United Kingdom.”
The G20 leaders have asked the IMF to examine the whole area of financial sector taxes. Strauss-Kahn said the issue is a “delicate balancing act” given the current weak state of the financial sector. But he also indicated that the current lack of agreement could be storing up future problems.
“There is no magic bullet, but one possible answer is to reduce regulatory uncertainty. Lay out the future requirements and the timescale for implementation. Right now, regulatory uncertainty is throwing up some perverse incentives – it might be encouraging a risk-taking culture, a Mardi Gras effect whereby financial institutions party now in expectation of lean times to come.”
Staying on course
Despite its concern about public deficits, the IMF believes it is still too early to start unwinding the various efforts to stimulate economic activity.
“Exiting too early is costlier than exiting too late,” Strauss-Kahn cautioned.
He argued that “progressive tax systems” might be needed to prevent the poor suffering when the time does come to start balancing the books. The IMF also thinks that central banks should raise interest rates before starting to reverse “unconventional methods” such as quantitative easing.
“Especially in many advanced economies, monetary policy can afford to stay accommodative for some time, given little sign of inflation on the horizon.”
While the UK is still in recession, many emerging markets are now enjoying strong economic growth again. This is leading to a surge of capital into those countries, Strauss-Kahn warned.
“On one hand, we want capital to flow towards emerging markets … but these flows can clearly be destabilising. They could lead to exchange rate overshooting, asset price bubbles, and financial instability.”
In the long term, the world economy needs sustained growth. According to Strauss-Kahn, we are on the verge of a new paradigm where China generates the demand that was once provided by consumers in countries such as America.
“Households in the United States and elsewhere propelled the global economy with their voracious appetite for consumption, soaking up imports from countries that relied heavily on exports to grow. In retrospect, this model had major fault lines – much of the consumption was financed by an addiction to cheap and easy credit, and this flow was turned off, cold-turkey style, by the financial crisis.”
11.03am: It's not often that all three political leaders share the same stage, let alone on the economy: arguably the defining issue of the next election. Let's hope the CBI conference forces them to spell out their plans. Gordon Brown is finally in a confrontational mood, threatening to ratchet up his pressure for a transaction tax on the City. David Cameron has yet to seal the deal with the business community and Nick Clegg is riding high after weekend talk of a hung parliament. First up, Gordon Brown.
11.06am: Brown reminds the hall that this all started with the global financial crisis - ie. them, not him.
11.08am:
Choking off the recovery prematurely would be fatal
He's talking to you David.
11.12am: First mention of a global financial levy, but only as a list of options. This it not yet the determined defence of a Tobin tax we were promised.
11.14am:
Rising deficits are an inevitable consequence of the events of the last few years, but we are one of the first governments to announce plans to tackle them.
An important issue for the captains of industry in the hall, but barely a peep out of them. He'll have to do better than that.
Gordon Brown at the CBI. Photograph: Andy Rain/EPA
11.18am: More pledges to support new nuclear power; more broadband investment, more transport infrastructure etc etc. This is exactly what the business community wants to hear, but it doesn't exactly chime with the CBI's wish to get the public deficit down. I wonder why Brown doesn't make more of the irony.
11.22am: So far, it's a scatter gun list of government policy rather than a direct appeal for the support of the business community that Brown used to indulge in. I wonder if he's already given up on this constituency in his head?
11.23am: Big section on Europe from Brown. Another challenge to Cameron, who has to convince the CBI that he won't isolate British business from its biggest market.
11.27am: Finally, an announcement: an international investment conference in London next year. Some polite applause and then time for questions.
11.33am: Brown challenged on small business taxation. Tax breaks became a vehicle for tax avoidance, he insists, that's why they had to change.
11.36am: CBI chair Helen Alexander says questions have to be “very, very quick”. Brown mumbles that he has plenty of time, only to be politely informed that it's not his time they're worried about. Ouch.
11.38am: Brown says the government is setting out more plans for high speed rail in the next few weeks. Music to the ears of the CBI crowd from Manchester and Birmingham who now have to trudge down to London for their annual shindig after it stopped moving around the country last year.
11.40am: Alexander says that's it Gordon - time to get off. Polite applause, but there are other politicians to hear from now…
11.42am: Nick Clegg strides in, looking altogether more chipper after the weekend polling. His first address to the CBI as Lib Dem leader.
11.45am: Time to revisit the fundamentals of banking, says Clegg: What are they for? Good question, so rarely asked.
11.47am:
It is unacceptable that when taxpayers own so much of the banking industry, credit still isn't flowing to small businesses. Taxpayers shouldn't just be suggesting a change of policy, they should be insisting on it.
For a good chunk of the CBI audience, this is a really sore point. Business leaders seem less willing to challenge the City on this one though - curious.
11.50am: Clegg revisits the question of a levy on banking, adding one more detail than Brown did: he wants a windfall tax set at 10%. That's it though - no detail, no explanation. Funny how neither Brown nor Clegg choose to dwell on this question. They'd be surprised how many industrialists are actually with them on this one.
11.52am: A bit more on the banking levy - Clegg reckons a temporary tax on bank profits will raise about £2bn. That sounds pretty small beer given what others have been talking about.
11.56am: Clegg also talking about spending more than cuts, insisting that it would be “economic madness” to cut back on infrastructure investment at this point. There's definitely been a change in mood on this from politicians in recent days. Even Cameron has been talking about a budget for growth rather than an austerity budget once the Tories are in power. I wonder if the slash and burn talk has peaked?
12.01pm: Time for some more feisty questions from floor. Clegg asked to clarify his references to “unearned wealth” and “avoiding the trap of cutting public spending”. He pauses long and hard, “erm”.
12.02pm: Ok. Clegg dives in feet first and says that property is an example of unearned wealth, alluding to Vince Cable's plan to tax it more. Stony silence from the audience. Brave stuff, though.
12.08pm: Clegg challenged on nuclear power now. He's getting a really hard time from this audience. Brown gets a backhanded compliment when a delegate suggests he has more of a vision for business than the Lib Dems.
12.12pm: I have clearly failed miserably to be the slightest bit uplifting and visionary, admits Clegg, getting the first titter of the day from a very stony-faced audience.
12.15pm: Cameron gets a much warmer reception. Alexander says the CBI has continued to build its relationship with the Conservative party over the past year.
12.16pm:
You wait ages for one party leader and then three turn up at once.
Cameron actually raises a laugh from the audience.
12.25pm: Within 50 days of taking office, the Tories will announce an emergency growth budget, with plans to bring down the deficit, but also initiatives to stimulate business with lower taxes - a neat trick, if he can pull it off.
12.27pm: Cameron claims that the government's need to borrow money is already crowding out private sector investment, pointing to the market-beating interest rates on offer at National Savings & Investment. Nobody seems to have told him that these were pulled over the weekend . Shame, it would have been an interesting point, had it been true.
12.31pm:
The relationship between the CBI and a political party should never be entirely smooth, we should have the odd argument, but frankness matters more than ever because the government has run out of money.
He's treading the tightrope between playing to the gallery and not appearing to pander. Big applause.
12.32pm: We've got plenty of time to take questions and answers, says Cameron with a smile that suggests he saw Brown's uncomfortable moment being bundled off the stage earlier.
12.40pm: Cameron faces questions again on Tory plans to replace the FSA's supervision of the banks with a beefed up Bank of England. Business is still not convinced about this one.
David Cameron addressing the CBI conference
12.44pm: Now Cameron is facing tougher questioning on his plans to scrap Regional Development Agencies, a big issue for CBI members outside London who rate these rather more highly than the politicians do. He appears to put his foot in it for the first time with a remarkably glib answer:
I don't think Britain does have very strong regional identities
I suspect the spin doctors might want to polish this argument a bit more.
12.48pm: Cameron quits while he's still ahead and ends the Q&A to warm applause. I'm going to take a break for lunch now and return later on to see what the business chaps have to say. Stuart Rose from M&S and Stephen Hester from RBS are both up after 1pm.
1.54pm: After an undignified scrum over the hot buffet, Britain's business leaders are back to listen to some of their own rather than the politicians. On the panel now is Stuart Rose of M&S, Stephen Hester (Britain's best paid civil servant), the boss of outsourcing giant Serco and (a special guest speaker) the US boss of Pfizer, who has just reminded us that his company is the largest single supplier of drugs to the NHS.
1.57pm: The spirit of trust between business and the public has evaporated, says Jeff Kindler, Pfizer's chief executive. He might not be as dull as he sounds.
2.02pm:
The people we serve are angry. People have come to believe that the rules meant to bring order to society are meant to benefit those that make the rules. People have had enough and the backlash is real. Sometimes this criticism is warranted and sometimes it is not, but when the majority of people don't trust you, they will find a way to make you do what they want.
This chap from Pfizer is good at diagnosis, not sure where he's going with the cure though.
2.14pm: Pfizer's research centre in Kent is the largest privately-owned medical research facility in the world, apparently.
2.21pm: Stephanie Flanders conducts a straw poll of the CBI audience to see how many are feeling that the economy is ready to start to recovering: about 3 people put their hands up. This is a pretty gloomy room.
2.22pm: Hester is one of the few bankers we can get to come out in daylight hours, quips Flanders.
2.24pm: Hester says thank you to the CBI for the bail-outs.
We are crystal clear that we would not be here were it not for the support from the government and the taxpayer.
2.30pm:
We are able to lend to exactly the same proportion of customers as we did before the crisis.
A very carefully-worded boast that is no doubt meant to reassure, but I wonder how many of the business people in the audience feel that lending condtions are quite as rosy as RBS makes out?
2.32pm: Stuart Rose can't resist trying to sell. Not sure how many of the audience are interested in his dine-in-for-£10 offers though.
2.33pm: Stuart Rose on the environment:
There was a time at M&S when the only green we knew was Philip Green.
Ho ho
2.40pm: Chris Hyam presents Serco and its ilk as the answer to the world's public sector deficits.
Spending restraint can be a catalyst for transformational change, but we need bravery too. For too long we have seen the delivery of public services based on the needs of the provider rather than the user.
Can't help but think we're going to be hearing a lot more of this sort of stuff over the next couple of years.
2.57pm: My colleague Allegra Stratton helpfully passes on an interesting complaint from Labour about David Cameron's attempt to enlist international support for his economic policies. Earlier on today, Cameron implied that the OECD and President Obama were backing his view that cutting public deficits now was the best way to strengthen the economy. Labour's one-man rebutal unit, Peter Mandelson, points out that the OECD was talking about reducing deficits only “once the recovery takes hold” and that Obama has also warned about the dangers of governments doing too little. It might sound like splitting hairs, but this issue of timing is going to be one of the big dividing lines of the next few months.
3.02pm: Stephen Hester touches on one of the big questions for politicians: do the tax rules encourage companies to take on too much debt?
It is true that thanks to the tax system there is a very big difference in the cost of debt and the cost of equity and you could argue this played a big part in what happened.
Stuart Rose agrees that it is a problem.
So when is the CBI going to start the campaign?
3.05pm: They're close to wrapping up now and I'm heading off. My colleague Kathryn Hopkins is sticking around to hear what Adair Turner has to say. More thoughts from me later on what it all means.
Labour's hopes of avoiding a general election rout at the hands of David Cameron's Tories will be boosted today as a new poll shows a sharp fall in the Conservatives' lead, raising the possibility of a hung parliament.
The Ipsos MORI survey for the Observer, which will cause alarm in Tory ranks and boost Labour's hope of performing a “great escape”, puts the Conservatives on 37%, only six points ahead of Labour on 31%. The Liberal Democrats are on 17%.
It is the narrowest gap between the two main parties in any poll since last December and demonstrates that, rather than powering towards a landslide victory, Cameron's party is struggling to capture the number of floating voters it needs to win a decisive mandate.
The poll, which also shows economic optimism at its highest level since 1997, suggests that Labour may be benefiting from a return of a “feelgood” factor as the country heads out of recession.
About 46% of the public now believe the economy will perform better over the next year, compared with 23% who think it will deteriorate and 28% who say it will stay the same. If the voting intentions are replicated at the next election, probably in May or June, the Conservatives will hold the most seats but fall 35 short of an overall majority in the Commons.
It would be the first general election to have delivered a hung parliament since 1974. If Labour was to cut the Tory lead to five points or fewer, pollsters say it would be likely to have more seats than the Tories.
Labour, which only six months ago was 20 points behind in several polls, pledged to make stewardship of the economy the central issue in its battle for a fourth term in office. Douglas Alexander, the party's general election co-ordinator, said: “The economy will be the defining issue at the election,” with the choice being one between “economic recovery with Labour and putting the recovery at risk with the Tories”.
Sir Robert Worcester, the founder of MORI, said: “This poll will jolt the electorate into the reality of British politics in the run-up to the election. Whether or not there has been a blip among the electorate caused by short-term events such as Labour's surprise win in Glasgow North East, it will not be easy for the Tories to gain the 117 seats they need for an overall majority, never mind the 140 they require for a working majority.”
Meanwhile, Gordon Brown's personal rating remains in the doldrums. Only 34% of people are satisfied with his performance, against 59% who are dissatisfied. David Cameron had approval ratings of 48%, with 35% against.
With the main parties set to fight an election on the economy, Brown will seek to strike an upbeat note in a speech to the CBI tomorrow. Economists and politicians will then await Wednesday's update from the Office for National Statistics, which will confirm whether the country's economy did contract by 0.4% in the third quarter.
There are also signs that retailers can look forward to a much better Christmas than last year. John Lewis, the department store chain, said the Christmas frenzy had already begun, with sales for the first part of last week 15% up on last year. David Barford, its director of selling operations, said: “This is really encouraging. Branches are noticing a definite Christmas feeling.”
The most recent unemployment figures, which showed the smallest rise since spring 2008, also provide grounds for optimism. The number of Britons out of work rose by 30,000 less than expected to 2.46 million in the three months to September, the lowest increase since May last year.
There are also signs of life in the property market. The Nationwide index has posted monthly gains in seven out of the past eight months, and mortgage approvals are on the rise. However, economists remain concerned about the dire state of the public finances – presenting whichever party wins the election with a mountain to climb.
Ipsos MORI interviewed a representative sample of 1,006 across Britain by telephone on 13-15 November. Data was weighted to match the profile of the adult population.
Trading was subdued with financial markets in Japan closed for a national holiday. Oil hovered above $78 a barrel while the dollar rose against the yen and fell versus the euro.
Hong Kong's Hang Seng index was up 140.15 points, or 0.6 percent, at 22,588.44 while South Korea's Kospi was off 2.72, or 0.2 percent, at 1,617.88.
Elsewhere, Australia's index gained 0.6 percent and China's Shanghai benchmark rose 0.1 percent. Markets were lower in Indonesia, Malaysia, Thailand, New Zealand and the Philippines.
Investors are cautious because of an upcoming slew of figures on the world's largest economy including revised GDP growth for the third quarter. Many analysts expect the initial estimate of a 3.5 percent annual growth rate to be lowered.
Also due this week are reports on home sales, unemployment, consumer confidence and demand for big-ticket manufactured goods.
"Everybody is watching to see if the U.S. consumer will go out and spend," said Jackson Wong, vice president at Tanrich Securities in Hong Kong.
There's also a focus on the U.S. dollar, he said, after it regained strength amid safe haven buying sparked by Dell's gloomy business outlook and European Central Bank plans to start reining in stimulus programs.
Investors tend to seek refuge in the U.S. currency and gold when they perceive other assets such as emerging market stocks and commodities have become too risky.
Stocks, particularly in Asia, have risen dramatically from their lows in March but there are nagging doubts the global economic recovery isn't keeping up with the markets.
On Friday in New York, the Dow Jones industrial average fell 14.28, or 0.1 percent, to 10,318.16, skidding for the third straight session. For the week, the Dow fell 119 points, or 1.1 percent.
The broader Standard & Poor's 500 index fell 3.52, or 0.3 percent, to 1,091.38, while the Nasdaq composite index, dominated by tech stocks like Dell Inc., fell 10.78, or 0.5 percent, to 2,146.04.
Investors sold U.S. stocks after Dell said net income dropped 54 percent in the third quarter and warned it faced an uneven recovery.
Oil prices rose with benchmark crude for January delivery up 73 cents at $78.20 on the New York Mercantile Exchange. The contract lost 58 cents to settle at $77.47 on Friday.
In currencies, the dollar rose to 88.88 yen from 88.79 yen. The euro rose to $1.4937 from $1.4859.
The country needs a jobs program and needs it right now. Cash for Caulkers would be a good start. A new Civilian Conservation Corps would be another. But let's not allow a jobs program to cover over the need for real changes in the structure and core principles of our economy.
Yes, an effective jobs program can help people hold out a while longer - until necessary changes are made. It can make the unemployment rate will look better, for a while, and maybe the GDP will climb a little bit. But our low-wage, everything-to-the-top economy is not sustainable and needs to be redesigned and re-regulated. The economy has to be changed so that it works for all of us, instead of just a few.
What if the government passes a jobs bill, and these new jobs follow the current American job model of paying too little with no benefits? What if the government uses contractors, as they now do for so many government functions, and the contractors “reduce costs” by paying very low wages and no benefits, sending the rest of the cash to a few at the top? Does it really help the economy and the country to provide a bunch of low-paying jobs with no benefits, and make a few wealthy executives even wealthier? Or suppose the government starts a massive infrastructure modernization project? Does it help the economy if they hire construction firms that pay as little as possible or use Chinese steel?
Even if a government jobs effort provides good-paying jobs with good benefits, this still won't change the need to restructure the rest of our economy so that it, too, provides good pay and benefits to all of us instead of concentrating all wealth and income at the top.
As long as our economy is structured to pass everything up to a few at the top, stimuli can't work well, and jobs bills can't work well, either. Neither can anything else. In the end things will just revert to the old ways and we'll need more bailouts, stimulus and jobs programs.
The problem is that there are two economies now. There is an economy for the top few and an economy for the rest of us. And this problem is global. The world's economy is structured to send almost everything to a global top few.
Everything just goes to the top now. Companies are structured that way, jobs are structured that way, taxes are structured that way and now even our government is structured that way. Our economy has been turned into a machine that sends every dollar to an already-wealthy few. So efforts to stimulate economic recovery using traditional methods cannot work. It will just make a few at the top even richer.
We need a jobs bill because the economic system has broken down. We needed a stimulus package because the economic system has broken down. All the bailouts and jobs bills and stimulus are just one more stopgap effort to keep a broken system going, for the continued benfit of the few at the top. Changes must be made.
One barrier to fixing our broken economy problem is the structural corruption of our Congress. Every effort to help the people seems to get hijacked - and never mind working on the needed reregulating and restructuring. The recent extension of unemployment insurance, for example, included only $2.4 billion for the unemployed, but had more than $20 billion tacked on, going directly or indirectly to (owners of) big homebuilding companies. Another example, the health care reform bill is turning into a law ordering people to buy insurance from the big insurance companies. This year's big stimulus package was watered down with even more tax cuts for the few, like getting rid of the Alternative Minimum Tax.
The biggest example, of course, was last year's financial sector bailout. Taxpayer dollars saved the asses of the companies that caused the collapse and are now serving up $140 billion for financial-sector bonuses but 10% unemployment for the rest of us!
If we want to get out of this mess we have to restructure and reregulate the whole system. We have to change the structure of our economy so that regular people receive the benefits. It is time. There is no more getting around it.
Next post: some of the structural problems that must be changed.
This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.
In the aftermath of the worst recession in decades, many are concerned about future growth in our economy. Consumer behavior has fundamentally changed. Deflation seems possible, unemployment is rising, housing has collapsed and banks are reluctant to lend.
Conventional wisdom says things are different now and so the recovery will be weak, if at all.
This is not dissimilar from the sentiment prevailing at the end of previous recessions.
In 1932, investors were melancholy about the future. The entire world was in depression, capitalism seemed like a failed experiment, unemployment was at 25%, and Nazi Germany was advancing. But the S&P rose 34.8% a year over the next five years.
And in 1949, U.S. budget deficit as a percentage of GDP was higher than it is today, communism was spreading, and the Soviet Union was threatening a nuclear annihilation. Stocks rose 23.2% a year for the next five years.
In 1982, with a long recession and unemployment at almost 10%, conventional wisdom was that an economic recovery is not a realistic probability. Prominent economists worried the recovery will be paltry. The scars of runaway inflation and the 1970's energy crisis, together with high interest rates, seemed to ensure a stagnant economy.
Yet 1982 proved to be a launch pad to a historic bull market in stocks. And over the next two years, the economy grew at more than 6% annually.
In the 20th century, with all its turbulence, violence and turmoil, U.S. stocks had a real (inflation adjusted) return of 6.9% a year, versus 1.5% for Treasury bonds. The Dow started the century at 66 and ended it at 11,400.
Of course the excesses from the housing boom of the last few years will have their toll, but history shows the worrywarts are often wrong. The psychological cycle is always the same. It starts with doubts about the sufficiency of the stimulus, then says the recovery is fake and the economy will soon stall or double dip, then that profits will not recover enough to justify stock prices. When the recovery proves enduring, it is feared to be unsustainable. We always end up being fine.
The business cycle is not dead. America has many coping mechanisms to deal with the current hangover. As it has before, this country will unleash the innovative, hard working and productive side of its citizens, and allow people to maximize their potential. Something that is now unknowable and unimaginable can boost GDP growth in the same way that previous inventions and technological breakthroughs did in the 1960's, 70's or '90s.
Meanwhile, the basic premise of investing is, buy low and sell high. And low is when nobody else wants it.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com
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